CRR: Banks don’t want liquidity to fall, urge RBI not to carry forward CRR

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Indian lenders have requested Reserve Bank of India (RBI)reserve Bank of India) not to increase the cash reserve ratio further (CRR) in the next threshold Monetary policy To ensure uninterrupted credit growth amid a clear reduction in surplus liquidity since early May, two people aware of the representations told ET.

The Indian Banks’ Association (IBA) requested the central bank on behalf of lenders last week after additional liquidity fell to around ₹3.5 lakh crore – nearly half the amount retained by the RBI through the pandemic.

“Earlier, the surplus liquidity was around Rs 6 lakh crore, now it is almost half,” said a banker. The previous increase in CRR to 4.5% resulted in a loss of around Rs 90,000 crore from the system.


‘System in neutral liquidity mode’

Cash reserve ratio is the ratio of deposits held by banks with RBI. “With the expectation that credit growth will pick up from Q2 onwards, we have represented to the regulator not to increase the CRR in view of the shortfall in surplus liquidity over the past few months,” the banker said.

Market participants surveyed by ET ahead of the policy announcement later this week did not rule out a further hike in CRR as the central bank seeks to rein in inflation.

Another banker told ET that the system was already in neutral liquidity mode.

CRR

The person cited above said, “As per the regulator’s calculations, the neutral liquidity position is +/- 2% of the net demand and time liabilities, which should keep the normal liquidity levels around ₹3 lakh crore.” “If the CRR is raised here, it will put the system in liquidity deficit. We are approaching the peak credit season, and such a move will create a bottleneck.”

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Indian Banks Association did not respond to ET’s mailed query.

RBI held an off-cycle monetary policy committee meeting on May 4, announced the hike repo rate 40 basis points increase to 4.4% and CRR by 50-basis points to 4.5%.

One basis point is 0.01%.

According to the Monetary Policy Committee, the deteriorating outlook on inflation led to timely action to contain inflationary pressures. According to analysts, the increase in CRR led to margin compression of around 3 bps for the banking system.

To be sure, experts pointed out that the request for not raising the CRR limit is also motivated by the view that the regulator does not pay any interest on the CRR balance maintained by banks. As of May 27, 2022, Indian banks have deposited Rs 8.17 lakh crore as CRR with RBI. “The CRR balance gives negative returns for banks as they have to pay depositors on those funds, so they do not want the regulator to hike the CRR further,” said an analyst at a rating firm, on the condition of anonymity.

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